Many people know about investing in the stock market for capital gains, mainly to buy low and sell high. However, investing in stocks can also be profitable by collecting dividends from stocks. Dividends not only boost the returns of the investments but can also be used to generate passive income streams, see 5 Reasons Why You Should Invest In Dividend Stocks.
What are Dividends?
Dividends are basically payments made by Companies to the shareholders to reward them for owning the shares. Companies are setup for purpose of making a profit and when a Company makes profit, it can choose to either 1) Retain it in the business for reinvestment purposes or working capital 2) Pay out to shareholders as Dividends. When you buy shares in the companies, you basically become a partial owner of the Company, so you will be entitled to these Dividends.
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Why Do Companies Pay Dividends?
As discussed earlier, the primary reason is to reward existing shareholders for holding the Stocks of the Company. When shareholders stay invested, it shows that they believe in the business and the strength of the management to continue running the Company. Furthermore, an attractive Dividend policy continues to attract newer investors and encourage existing investors to buy more shares. Since this stimulates demands for the shares, it will also help to prop up the price of the shares.
How Are Dividends Paid?
Dividends are usually paid in cash to the shareholders. For Singapore Stocks, CDP has a direct crediting service which banks the dividends automatically into your bank account. If you are not enrolled in the service, then they will send cheques to your mailing address. Shareholders may also opt to receive the Dividends in stocks instead. Companies which offer Dividend Reinvestment Schemes (DRIPS) will usually calculate the stocks issued based on market price or a slight discount to current market price. This helps the Company to preserve cash while allowing the investor to reinvest Dividends at a lower cost to market.
How Do You Know If The Company Gives Out Dividends?
For Singapore stocks, there is an easy way to get Dividend Information. All the dividend data on Singapore Stocks can be found on the SGX website listed under corporate actions. As long as the Company is listed inside, you can see the historical track record of the Company’s dividend payout. For newer Companies without a track record, look for their dividend policy which is listed in the prospectus that states whether they are likely to give out dividends in future.
When Are Dividends are paid out?
Each Company has its own Dividend payment schedules, some pay out quarterly, some semi-annually and others yearly. The Board of Directors will announce the Dividend amount and date, usually on release of earnings report. Ex-Dividend date is the most important date to remember as it is the date the stock trades “excluding” Dividend. So if you buy it on Ex-Dividend date, you will not be entitled to the Dividend. You will only receive the payment of the Dividend on Payment Date itself. Both the Ex-Dividend dates and the dividend amounts can be found on the SGX website.
About the Author
Calvin Yeo is the Managing Director of Doctor Wealth Pte Ltd (www.drwealth.com), which is an online financial planning platform. He is also a Chartered Financial Analyst (CFA) as well as Certified Financial Planner (CFP).
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